We came away from our recent plant visit to INARI’s P13 and P55 plants in Bayan Lepas, Penang with a renewed conviction on the company after learning about its customer requesting the group to add in more RF testers for the upcoming US smartphone launch in September. A positive change we noticed in the facility is the integration of its proprietary EMI machines with each RF tester which further widens the gap between the company and their competitors, increasing customer’s dependency on INARI. Maintain OUTPERFORM with an unchanged Target Price of RM3.30 based on 28.5x FY23E EPS.

Key takeaways from our recent plant visit to INARI’s P13 and P55 in Bayan Lepas, Penang.

1. During our visit to INARI’s production facility, we learnt that the group is preparing for the annual ramp up of its radio frequency (RF) business in anticipation of the upcoming US smartphone model slated to be launched in September. The group’s utilisation rate is currently at c.75% which is expected to gradually increase till c.90% nearer to launch date. Interestingly, INARI has also brought in more RF testers on customer’s request which will be fitted in the P55 plant while the P13 plant is already fully occupied. We deem this a positive sign, indicating that the US smartphone manufacturer is confident of the upcoming model’s marketability.
    
2. A difference we noticed during the plant tour compared to a previous visit before the pandemic is the integration of the electromagnetic interference (EMI) shielding equipment with each RF tester. While the RF filters from INARI is still used for the sub-6 Ghz bandwidth in the end-product, the group mentioned that the filter’s capability can actually extend up to 20 Ghz; hence, the need for EMI equipment to ensure that the test results are obtained in a controlled (free from interference) environment. Note that the EMI shielding equipment is a proprietary product of a JV between INARI and Singapore-based MIT Semiconductors that was announced back in Aug 2020.
    
3. While INARI is two years ahead of mass adoption with regards to its venture into double-sided moulding (DSM) process for RF, the group is confident that its direction is in line with customer as DSM allows for: (i) higher chip density per PCB, (ii) slimmer design, and (iii) reduction in PCB usage.

We maintain our forecast for FY22E and FY23E’s CNP.

Maintain OUTPERFORM with an unchanged Target Price of RM3.30 at 28.5x FY23E PER, representing a slight premium to peers’ forward average of 26x, justified by INARI being: (i) the closest proxy to 5G adoption, (ii) able to sustain strong margins while (iii) expanding its revenue stream with new businesses.

Risks to our call include: (i) less aggressive orders from its key customer, (ii) delay in 5G roll-out, and (iii) higher input costs.

Source: Kenanga Research - 4 Jul 2022